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The substantive economy of money : Karl Polanyi in the
tradition of ”old institutionalism”
Jérôme Maucourant
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Jérôme Maucourant. The substantive economy of money : Karl Polanyi in the tradition of ”old
institutionalism”. Working Paper du Centre Walras, N177, 1995. 1995. <halshs-00569422>
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THE SUBSTANTIVE ECONOMY OF MONEY
—KARL POLANYI IN THE TRADITION OF “OLD” INSTITUTIONALISM—
Introduction
First Part - The Purpose of a Substantive Economy
§1/ Karl Polanyi's Method : a point of view
§2 / Substantive Economy and the Question of Value
§3 / Institutions and forms of integration : economy as an instituted process
A/An institutionnalist conception of institution
B/ A few categories of substantive economy
1- Reciprocity and Symmetry
2. Redistribution and Centricity
3 - Exchange and Market
Second Part - Money As An Institution
§1/ The specificity of Archaic Monetary Institutions
A/ The breakout of the “cattalactic triad”
B/Money without Market
1/ Archaic banking
2/ Coins in Classical Greece
§2/ Money as a political means of social integration
A/The case of non-modern economies
B/The case of modern money : the paradox of the money of the “Big Market”
Conclusion
2
Introduction
The purpose of this contribution is to suggest an interpretation of substantivist thought initiated
by Karl Polanyi. An approach such as this is concerned with “historical economics”, in the precise
sense that substantive concepts do not come from a retrospective projection of modern
prejudgements, but rather from an attempt to apprehend universal categories of economic analysis
in order to clarify the genuine singularities of different economic systems1. In doing this I shall
highlight the coherence of institutionalist thought2 founded by economists such as Mitchell,
Commons and Veblen, into which the reflections of Karl Polanyi fit. In this way, Polanyi thinks of
money as an institution that submerges the economy into social relationships. As an analytical
result, stripping money of its institutional character and trying to reduce it to a commodity, can only
create chaos.
In order to give an account of Polanyi's project, I will show, in the first part of my analysis, how
Polanyi wants to move away from the idea that economy is created on pure rational logic.As a
result, economy owes its very existence to "institutionalised processes" which produce the very
inflexibilities necessary for both collective and individual action. Taking this into account, it is
impossible to presuppose the unity of “the cattalactic triad” i. e. external trade, money and markets.
From this point on, it is possible, in the second part of this analysis, to specify certain interesting
results for the economic history of money. From a transhistorical viewpoint, this institution sets the
rules for the quantification and extinction of debts. However, in contrast to modern money, archaic
money is characterised by a separation of functions which compel us to talk about “money uses”.
Consequently, it is better to speak in terms of accounting and payment practises rather than using
the single word of “money”. Furthermore, the independence of money in relation to market is a
characteristic of numerous archaic societies. Nevertheless, in spite of their differences, both ancient
and modern monies politically produce social integration.
1We
are aware that since Polanyi's latest works, there has been series of contributions which have enriched the
debate (see for instance, North [1980], Silver [1983] and [1985], Mayhew & alii [1985] and Janssen [1975, p. 560]
amongst others). This point of view concerns the history of ideas. But we can hope that the history of ideas is also able
to put forward arguments in the controversy concerning the analysis of ancient economic facts. See Gentet &
Maucourant [1991, b]. We may also notice that the richness of Polanyi's approach is taken into account beyond strict
heterodoxical works [Orlean, 1992].
2Maucourant [1994, b].
3
First Part - The Purpose of a Substantive Economy
§1/ Karl Polanyi's Method : a point of view
Karl Polanyi defines “formal economics" as the pure reign of calculating reason in the context of
scarcity of goods when the ends are given. Karl Polanyi is more interested in studying the capacity
of power relations and values in order to institute a certain number of economic practices3. In this
way, Polanyi presupposes that economic activity is not isolated, and that institutional analysis
remains a way of carrying out economic reflections. One should note that there is no reason to deny
the hypothesis that individual rationality has a large field of effectiveness and, as a result, to
imagine the existence of a totality that is radically independent from its component parts. The
determinisms resulting from individual interest are not neglected by Polanyi, a factor which once
again brings him closer to Commons4 : according to both authors, political authority intervenes as a
result of the reaction of individual interests that are threatened in a convergent manner. Taking the
case of tribal society into consideration which is largely founded on gift and counter-gift, Polanyi
further remarks that5 :
“the premium set on generosity is so great when measured in terms of social prestige as to make
any other behavior that of utter selforgetfulness simply not pass”.
Modern anthropology invalidates fantasies that are connected to “the communist psychology of
savages”6 ; man has always aimed at maximising his social interests7 :
“Aristotle was right : man is not an economic, but a social being. He does not aim at
safeguarding his individual interest in the acquisition of material possessions but rather at ensuring
social good will, social status, social assets. Man's economy is, as a rule, submerged in his social
relations”.
More generally, the hypothesis which states that institutional constraints structure behaviour
does not contradict the idea that self-interest is the driving force behind action, provided that one
acknowledges the nature of the ends prescribed by the institution. As a result, individual interests
are not autonomous.
Therefore the embeddedness hypothesis in social ties calls for the redefinition of the field of
economy. Indeed, one has surrepticiously introduced the impossibility of the “enclosure” of the
economic field, a factor which implicitly amounts to a definition of economy as a social subsystem.
Actually, a science of action with a pure rational purpose could, theoretically, urge us to describe all
3In this respect money as an institution is a device that institutes a "public purpose" into economy. such as
Commons stated. According to him, if McLeod is the initiator of institutional economics, it is because of his penetrating
analysis of the “commoditisation” of debt, and above all because of the idea that the central bank must eventually go
against private banks. If we consider now Mitchell’s study of the progress of money economy in England, one must
note the importance of the State and power relations in this process (cf. Rutherford in Mitchell [1996] and Mitchell
[1996]). Actually, it is not evident that the lowering of transactions costs, which is allowed by the growing use of
money, is spontaneous (cf. the case of Africa analysed by Servet [1994, b]).
4Cf. Neale [1990, p. 147].
5Polanyi [1957, c, p. 46].
6Polanyi [1968, p. 65]. Of course its the same for "the myth of savage devoted to barter" that comes from Smith
[Polanyi, 1957, pp. 43-44] in which we find an archeology in Servet [1994, a].
7Polanyi [1968, p. 65].
4
behaviour as economic. Therefore, the question here is of restricting the possible scope of
economics while introducing a degree of anthropological complexity.
§2 / Substantive Economy and the Question of Value
For Polanyi8 :
“The truth is that man has been very much the same all through history”9.
This concept allows us to advocate a definition of economy which incorporates the institutional
varieties that stretch throughout history10. Carl Menger supplied Polanyi with a solution to this
problem. In the 1923 German edition of his “Principles”, Menger sets an "economising direction” a characteristic of civilised societies - against a “technical direction” which only results from
physical particularities of production11. He does this with the intention of safeguarding his
“Principles” which would be challenged by later anthropological discoveries12.
Thus Polanyi can suggest a definition that is substantive to economy, focusing upon the idea that
the livelihood of man is not strictly determined by scarcity, in so far as custom or politics eliminate
the choice of agent13. Only a specific institutional situation, that of price making markets, can
completely reduce the substantive sense of economy to a formal sense of economy. In this case, a
general state of scarcity exists as economic agents are able to make a infinite number of choices
provided by markets.
Therefore one can say that Polanyi, following Aristotle, rejects the theory of utility-scarcity
value. Indeed, Polanyi emancipates himself from the common postulate of an “unquestionning
acceptance of the sovereingty of individual wants”14 considerating the “real” human needs that
Aristotle names “natural”. Actually, Aristotle understands the social nature of scarcity, which must
be distinguished from the obviousness of the “finite state of things”15.
According to Aristotle, human choice and desires are not limitless because they had to be
submitted to the civil imperative of an honourable life. The essence of life 16 according to Aristotle,
8Polanyi [1947, p. 99].
9Berthoud also highlights
that hypothesis that the constancy of human nature entails a hypertrophy of the interest
brought to institutions and to the cultural factor.
10One consequence of this anthropological constancy is that humanity could never construct its society in a lasting
fashion using methods that are totally economically individualist or collectivist. Polanyi rightly observes that, in fact,
since the oldest Antiquity, one knows always how to escape ideological dichotomies ; liberty vs bureaucracy and
economic total planning vs market. On this subject, he cites the example of a mesopotamian trading corporation, of
athenian customs of the classic age and of the kingdom of Dahomey in the 18th century [Polanyi, 1977, XLi].
11Cf. Polanyi [1977, pp. 22-23].
12One should note Polanyi's profound display of respect with regards to the marginalist school of thought, because,
according to us, utalitarian behaviours result from the mental impregnation of market institutions. Mitchell already hold
a viewpoint on “money economy” which is not far removed from from Polanyi’s thinking [Maucourant, 1993, b].
Elsewhere, the influence of the Austrian school of marginal utility on Polanyi is certain in the socialist economic
calculation debate. The future author of the Grande Transformation in 1922 is looking for an alternative to central
planning which he considers impossible - as would his brother Mickael later [Polanyi, 1989, pp. 148-149]- and pure
market economy that he asseses to be a source of wasting. One can find a presentation of this non-marxist criticism of
capitalism in Rosner [1990] and Maucourant [1994, a] ; a translation in french Polanyi's text is available in Polanyi
[1994]. To our knowledge a translation in English does not exist.
13Cf. Polanyi [1977, p. 27].
14Cf. Hodgson [1992, p. 436].
15Berthoud [1986, p. 67].
16Polanyi [1977, p. 30].
5
i. e. theatre, trials, politics and the contemplation of good, prohibits any type of effective economic
accumulation. A contrario, the free display of pecuniary activity is contradictory to the “natural”
order of the City which is based on three principles, self-sufficiency, community (resting on the
value of living together, the phylia) and justice (in the sense that everyone receives that which is
due to his “nature”)17. The fact that Aristotle has a substantive conception of economy explains his
fear that economy could actually become removed from society. It is this fear that highlights his
importance as an economic thinker18.
It is clear that Polanyi, concerned about justice (in its modern and democratic form), national
sovereignty and the permanence of social ties, is just as anxious as Aristotle could have been, when
faced with developments of market which contradict the idea that the economy should be the
embodiment of a human purpose. Thus, the liberal doctrine, which states that the law can do
nothing but institute the means of action, and not the ends, is the antithesis of Polanyi's socialism19.
In fact, in this type of socialism, democratic debate determines social ends. Polanyi's proximity to
Veblen is just as strong. Both authors agree with the Aristotlian ethic that rejects the continual
pursuit of ends that are constantly changing in consumption. Paradoxically the criterion of welfare
of utilitarianism is this infinite multiplication of envious comparisons.
However, one should not forget the element that stops us making a direct filiation between
Polanyi, Marx and Aristotle. Indeed, it would be wrong to think that Polanyi supports a radically
objectivist conception of value. Perhaps, and here rests our hypothesis, Polanyi even wishes to
emancipate himself from the paradigm of value in order to participate in a new paradigm built on
the recognition of institutions as creators of economic values.
In the first place, even if the “real needs” of man are changing, a democratic deliberation
concerning social needs can choose the preferred kind of technical progress. This is Polanyi's point
of view in the 1922 model of federal socialism. In the second place, even if the ends of social
activity should not be left, according to Polanyi, to a logic that is purely economic, it does not
follow that every type of economic spontaneity should be abolished. He recognises the
impossibility of central planning if division of labour is complex.
Consequently, this means that the evaluation of economic cost is not fundamentally a matter of
statistical evaluation, but the result of an intersubjective process. The local and concrete activities of
collectives of associated workers are the only means of examining the disutility of labour20.
Elsewhere, central planning, which makes human economy a technique, is a non capitalist form
of alienation, as, in taking responsability away from its producers, it denies the fact that ethics
should be associated with labour 21:
“Humanity will not be free until it knows the cost of its ideals”.
17Polanyi [1957
18According to
a, p. 79].
Polanyi, Schumpeter, convinced that the distinctive nature of economic analysis is formalising
scarcity mechanisms, cannot accept that.
19Maucourant [1993, a].
20Polanyi [1994, b & c].
21Polanyi [1994, a, p. 93].
6
Polanyi once again does not base that economy on value but on institutional theory which
enables him to return to Commons's question of “reasonable value”. Beyond the objectivity of Marx
and the subjectivity of Mises, Polanyi lies within institutionalism.
The illusion, which believes that value can exist outside an institutional “vestment" stems from a
totally utilitarian idea, common to both marxists and liberals. This illusion states that an economy
can exist in an autonomous way. More precisely the transformation that occured in the nineteenth
century which aimed at instituting a waterfight “closure” of the economy through the establishment
of One Big Market was, in fact, illusory.
§3 / Institutions and forms of integration : economy as an instituted process
A/An institutionnalist conception of institution
To place Karl Polanyi's work in institutionalism would signify that his contributions are lost for
the contemporary economist : the idea of the existence of economic “laws”, that are radically
independent to the rest of the social field, are in fact well spread. Nevertheless, it is clear that due to
certain recent and comunally accepted developments in economic analysis, a certain number of
doubts have arisen, thanks to the “undersocialised” view 22 of economic analysis23. Therefore, if
one acknowledges that economy is somewhat embedded in social relationships, one must pick out
in the economy the inscription of the logic that belongs to the political24 area and value system that
characterise a culture.
According to us, institution is a category which refers to the combination of different fields of
society and reveals a human purpose. The laws that govern the nature and possible extent of the
transfer of property rights, whether these be exclusive - in the cased of ideal private property - or
relative to its functions - in the case of public property in the ancient era - make up an essential part
of an institutional analysis.
Money is equally an institution in the sense that it is constituted by the rules which fix the
conditions of the issuing, evalutation, circulation and releasing of debts. With this transhistorical
perspective there is no exchange, but rather payment, as a social constraint which aims at releasing
debts.
The institutionalist tradition demonstrates a consensus on this point. When Polanyi confirms
that25 :
“In primitive societies, credit, through which debt is formalized, is provided originally by the
reciprocity practiced within clan and neighborhood",
22“Oversocialised"
economics is unbearable as only a super mind could understand the logic of the whole, which is
contradictio in adjecto. Cf. Hayek [1952].
23Granovetter [1994, p. 86] highlights the social networks that create market transactions. This legitimates A.
Orlean’s assertion about another contribution of Granovetter. The study of a history of a system with the cooperation
between economy and sociology would enable to remove from the indetermination relative to the nature of the final
equilibrium. Cf. Orlean [1994, p. 31].
24Here"political" does not indicate the central authority of social power, assuming that this could actually have
some concrete effectiveness ! Power relations can be apprehended at a local level.
25Polanyi [1977, p. 141].
7
he assimilates the original category of debt to that of gift. This could lead us to say that there is
no such thing as free gift. The institution of gift constitutes the “Invisible Hand of primitive
societies26. In the same way. Commons observes 27
“Primitive societies often have the institution of “gift” which is their method of creating debt,
and they are even known to have set up a money of account.”.
However, it is right to observe that the institution of social practices is not an arbitrary procedure
that arises from a pure will. Institutions express the empirical regularities of social life while taking
into account causes which can be economic. Commons is making this precise point when he asserts
that the “law” of supply and demand must not be abolished, but rather, utilised 28. One must not
confuse the arbitrary nature of a will that does not institute anything in a lasting way, except chaos,
and the device of collective action that fits into history 29. Actually, institutions are collective mental
entities made rigid by history. As a result, institutions, as regularities of collective behaviour which
create individual expectations, are the matrix of social order.
In other respects, we have attempted to show that Veblen defined de facto institution in this way,
a factor which could unify institutionalist thought. The case of money rightly illustrates this
institutionalist conception of institution. Veblen rejects the “conjectural history”30 :
“As instances of the use of this ceremonal canon of knowledge may be cited the “conjectural
history” that plays so large a part in the classical treatment of economic institutions, such as the
normalized accounts of the beginnings of barter in the transaction of the putative hunter, fisherman,
and boat-builder, or the man with the plane and the two planks, or the two men with the basket of
apples and the basket of nuts. Of a similar import is the characterisation of money as “the great
wheel of circulation” or as “the medium of exchange”. Money is here discussed in terms of the end
which, ”in the normal case”, should work out according to the given writer's ideal of economic life,
rather than in term of causal relation”.
The problem is not actually knowing exactly what money should be according to the pattern
which represents human nature in a way that is just as abstract as utilitarian. Without any doubt, it is
not so much exchange which creates money, as the development of money as a way of
understanding the world which makes more and more exchanges possible 31.
B/ A few categories of substantive economy
Starting from macro-social considerations, Karl Polanyi considers the two sided nature of
economy : it is partly the process of interaction between man and nature, and partly an
“institutionalised process” insofar as the necessary livelihood of man requires the institution of
certain rigidities32 :
26M. Douglass [1989, p. 111].
27Commons [1992, p. 474].
28Commons [1992, p. 802].
29Gautier's [1992, pp. 42-52] account concerning Hume , notably on p. 43, is interesting to this respect.
30Veblen [1898, pp. 382-383].
31This view and the deliberate use of this extensive meaning of money was developed by Mitchell [1966,
1996].
32Polanyi [1977, p. 31].
p. 27 &
8
“If the material survival of men were the result of a mere fleeting chain of causation-possessing
neither definite location in time or space (that is unity and stability), nor permanent point of
reference (that is structure), nor definite mode of action in regard to the whole (that is function),
nor ways of being influenced by societal goals (that is policy relevance) -it could never have
attained the dignity and importance of human economy”.
Polanyi therefore defines empirical regularities which are fundamental to all social systems
allowing the integration of economy, therefore assuring its permanence. This collective behaviour,
called “form of integration” 33 fits into the “supporting structures” of society.
1- Reciprocity and Symmetry
Polanyi defines this form of integration and supporting structure in the following way34 :
“Members of group A could then establish relationships of mutuality with their conterparts in
group B, and vice versa ; or three, four, or more groups may be symmetrical with regards to two or
more axes, and the members of these groups need not reciprocate with one another but with the
corresponding members of third groups toward which they stand in analogous relations. A number
of families, living in huts that form a circle, might then assist their right-hand neighbors and be
assisted by their left-hand neighbor in a endless chain of reciprocity without any mutuality among
them".
2 - Redistribution and Centricity
“Redistribution designates appropriational movements toward a center and out again”35.
Redistribution can experience certain distinctive modalities such as “householding”, the Greek
“œconomia” or the roman “familia”36. In this way “householding" concerns a social sub-group in
which redistribution functions. Here, as Polanyi maintains, we are not concerned with the first form
of economic life. Only a certain advancement of agricultural techniques, allows the autonomy of a
subgroup37.
3 - Exchange and Market
In contrast to a widespread conception, isolated existences of exchange between individuals does
not amount to the existence of a coherent institution, that is to say, the market 38 :
“Acts of exchange on the personal level produce prices only if they occur under a system of price
making markets, an institutional set up which is not created by mere random acts of exchange”.
33Polanyi's
taxonomy is changing even if his intentions do not change. It is the unity of an idea which is interesting
to us here. For the sake of detail, one can note that in 1944 writings “redistribution” is called "principle of behaviour"
and in 1977's text "forms of integration" ; the “centricity” is "institutional model" but become “structures”. It is clear
that these semantic variations do not change anything. We suggest calling “institutional model” a special set of
institutions which includes their relations to culture and historical singularities that an economic analysis must, in the
first instance, overshadow. In this way the Assyrian institutional model differs from the Egyptian one, even if
redistribution is a main feature of these archaic systems.
34Polanyi [1977, pp. 38-39].
35Polanyi [1957, b, p. 251].
36Therefore, the different sub-structures which support redistribution can be sex (the family), setting place (the
village) or political power (a feudal centre).
37The concrete observation moreover shows that, in the case of the most primitive societies, the shortages created
by natural disasters are divided up in an equal manner. In order to devise a genuine autonomy for all these subgroups,
one must therefore set out more advanced techniques.
38Polanyi [1957, b, p. 251].
9
More precisely, for the exchange to be “integrative”, that is to say in order that exchange
behaviour creates social integration, it is necessary that exchange rates are negociated and not fixed
by custom or authority.
Second Part - Money As An Institution
With the publication of the Great Transformation, Polanyi continuously highlights the function
of social integration 39 created by money throughout history. Certainly, it does not follow that the
appearence and meanings of money are unchanging. The question of social integration seen from
the point of view of money will be examined in the period before and after the Big Market.
§1/ The specificity of Archaic Monetary Institutions
A/ The breakout of the “cattalactic triad”
From the birth of the utopia of the “Big Market”, the domination of money as a means of
exchange entails concomitant advancements of the “commoditisation” and “monetisation” of
society. But this is not always the case as money is linked to requirements prior to the “One Big
Market”. Money is a means of organising men into a hierarchy and cancelling out debt. The word
“debt” here refers to a constraint of a social i. e. here political nature. This is why Polanyi wishes to
break up the “cattalactic triad”, thinking of an alternative to the “conjectural history” of the
market40 already denounced by Veblen.
“Cattalactically, trade, money and market form an indivisible whole [...] such an approach must
induce a more or less tacit acceptance of the heuristic principle according to which, where trade is
in evidence, markets should be assumed, and where money is in evidence trade, and therefore
markets, should be assumed”.
When Polanyi disassociates the question of money —which refers to the modes of cancelling out
debt— from the question of the market, Commons asserts :
“yet historical investigations show [...] that Hawtrey's logical foundation, Debt, is also
historically the starting point of an economic history which is not a romance. [...]It needs only
Knapp's distinction of unrealeasable and releasable debts [...] negotiability, and legal tender, to
bring about an economic theory which not only unifies production with credit but also history with
logic”41.
Money, as a rule, is independent from the market. In keeping with this institutionalist tradition, it
is important to stress that money should not be regarded as a thing but as the institution which
governs the issuing, evaluation, circulation and cancelling out of debts. This is why social
integration, which money contributes towards fulfilling, is, from its origins, strongly impregnated
with power relations. Before examining these methods of politically integrating economy, it is
advisable to examine the archaic functions of money.
39The "integration" here in question
40Polanyi [1957,b, p. 257].
41Commons [1992, p. 474].
can cause political oppressions.
10
B/Money without Market
For Polanyi, money should be divided into “special purpose” and “all purpose money”. This
division corresponds to the contrast between the two states of money, the first appearing before the
“One Big Market” and the other appearing after. In this way Polanyi succeeds in breaking up the
unity of a phenomenon that the cattactic approach had believed in. It may very well be that, with the
case of ancient societies, a type of money object could carry out the accounting function and
another object fulfilling the payment function 42. At times, even the possible field of payment or
account is strictly specified.
The fact that money uses are instituted separately, proves the very particular nature of nonmodern money. Money's submission to the singular imperatives of exchange is nothing other than a
characteristic of the “One Big Market” institution. Two examples will be raised in order to
understand how money does not have a natural vocation to create an integrative exchange. Better
still, money contributes43 to the avoidance of true money-market uses.
1/ Archaic banking
The absence of organised markets and coined money have characterised the institutional pattern
of Ancient Mesopotamia44. In this case, the requirements of trade and bartering necessitates the use
of money as a unit of account and the recording of debts which are the consequence of transactions.
Banking operations are therefore a “functional substitute” necessary in the absence of universally
recognised means of exchange. Therefore, the function of the banker is to organise clearing and to
witness to the existence of debt in an era when the spoken oath was fundamental 45 :
“In the end, there is not much to show that in Mesopotamia banking did actually prove itself an
avenue to the changeover from administered trade to market trade”.
The archaic bank therefore renders modern forms of money useless. Elsewhere, it is curious to
note that even when the Greeks introduce the market and coined money, banking does not develop
by conforming to exchange logic. No doubt this is due to the fact that the agora is only a “market
element” where the production goods are not exchanged. Anyway banking is reduced because of
the custom of paying cash46. In fact, the institutional pattern of the bank of ancient Greece seems
desperately rudimentary as though the specifically greek invention, the link of trade and money to
the market47, had not created the natural impetus of banking, despite the notable growth in the
market trade.
42The money in question can be totally abstract. It is this that Polanyi names "ideal unit". However the situation can
be ev en more complex. For example, a slave could have served as a unit of account and an external means of payment ;
the great local values being expressed in slaves. This signifies that a type of ideal slave was developed. Keynes had, in
the same way cited in his Treatise the case of the "average goat" as a unit of account in Africa [Keynes, 1971, pp. 1112].
43This fact can be also the result of redistribution requirements. Cf. Gentet & Maucourant [1991, a].
44Polanyi [1957, c, 15].
45Polanyi [1977, p. 142].
46By the nomismata. Cf. Polanyi [1977, p. 316].
47Polanyi [1977, p. 253].
11
A main role of trapetzoi is changing currencies48. Elsewhere, the city controls the activity of this
banker who is often a slave. Polanyi underlines that the bank is a public affair and not a private
one49. Even more fundamentally, the bank within this institutional pattern does not create money as
each bank loan cannot be made except on the order of the bank depositor. Otherwise, the bank loan
can be a capital investment of the bank50.
Finally, at no time is public deficit covered by bank loans. One has to wait until the end of the
Middle Ages to witness the development of such a phenomenon. This is most certainly due to a
mentality which, on principle, excluded deficit, whether it be individual or public, as illustrated by
the precepts of Xenophon 51. If a deficit ever occurred, sumptuary laws were used as an expedient,
as in Rome at a later date52. Another possibility for financing was the game on the metallic content
of money which made recourse to banking useless.
2/ Coins in Classical Greece
It is usefull to show how political authority is at the heart of the value of coins53, which means
that money is in essense fiat money. One example, among others quoted by Polanyi, shows to what
extent the regularities of market economy are difficult to bring to the fore in ancient Greece. In the
same way, a city in Asia Minor, experiencing a shortage of resources and having to pay back large
sums of money to mercenaries, found a strategy which alleviated the weight of debt. The rich
citizens of the town were forced to lend to the city in precious metals while they received money in
iron in return. The iron money was declared to have the same value as the money in silver. Thanks
to this procedure, the mercenaries were paid back in cash. One observes that the money supply,
internal to the City, did not rise.
Thus the hypothesis which states that a rise of global monetary circulation would be inflationary
is quite simply anachronistic, insofar as one implicity assumes the existence of an interconnected
market system. This is not not the case and can explain the rigidities of the ancient price system.
Furthermore, it is noticeable that the citizens are still being subjected to tribal prerogatives 54 as the
48 exchange table was called "trapetza" just like
49Polanyi [1968, p. 315].
50Polanyi [1977, p. 265].
51Ibid. p. 268 et Nicolet [1983, p. 203]. “It is
the table named "banca", from which the term "bank” originated.
true that financial conceptions, linked to money that is strictly
metallic, forbid any other practise that the adjustment of spending and resources”. Government deficit would not be a
possibility in England and France until the XVIIth and XVIIIth centuries. This weak development of banking in its
modern sense corresponds with an immersion of economy into society. C. Nicolet once again observes : “one mentions
principally economic phenomena considered from the point of view of their features or fiscal consequences”(cf. ibid. p.
204). In a more general way, it does not appear that the conclusions of C. Nicolet invalidate the substantive aapproach
to which de facto, a certain heuristic value (cf. ibid. p. 15 et pp. 30-37) is attributed. Certain hypotheses are
corroborated by C. Nicolet's own research about the meaning of the “generosity” of lenders who are not anxious
because of the absence of repayments. In fact, moneylending solidifies civil bonds. Ev en if this interpretation is
"biased and partial",according to C. Nicolet, it is thus useful to note that high banking is a means of superior
prestige because it creates obligees. Only then can money turn into prestige which is the the thing that is important in
Rome.
52Polanyi [1977, p. 270].
53In order to show the "particularity" of ancient mind, Janssen [1975, p. 545, fn. 13] ireminds the extreme
inexactedness of "intrisinc" value of the first nomismata.
54Polanyi [1977, p. 169]. As a result, the fact that the counterfeiting of money causes a rise in price can not be
considered as evident.
12
Cities are able to arbitrarily reduce current money to token money and they can easily play on the
fineness of monies and regulate prices.
§2/ Money as a political means of social integration
A/The case of non-modern economies
Following Tönnies, Polanyi made a sharp distinction between “community” and “society”.
Money, as a pure means of economic exchange is, according to Polanyi, associated to a
“tendency to fluidity and instability”55.
This is the mark of a “society” based on the levelling of conditions, even if it is imaginary. On
the contrary, the organic community of premodern times, is characterised by its stability. Thus, a
reversal of perspectives is proposed56 :
“Contrary to all assumptions, the origin of fluctuating prices, not of fixed prices, is the problem
for the historian of antiquity”.
Polanyi suggests a political hypothesis regarding the nature of non-modern money which takes
into account these strong rigidities57 :
“The variety and often minute articulations of money institution thus help to achieve integration
and stabilize status privileges without the use of open force (underlined by us)”.
In non-modern societies, money stability, which is at times multi-seculary is the rule while, very
openly, the differentiation of money is associated to social status58. In this way, in the Mali empire,
at around 1352, there exists a “poor man’s money” (a fine thread of copper) and a “rich man’s
money” (a thick thread of copper). The poor could only buy goods of rudimentary consumption,
while the rich could buy, not only these goods, but naturally the elite goods (such as slaves and
horses). This fact has an important consequence59 :
“lower class status [...] is maintained by restricting living standards to the coarse food and bare
necessities that native money is allowed to purchase ”.
So, the ostentatious standards of consumption are made rigid by rules that are relative to
payment and prevent the eventual richness of the poor person from being converted into prestige
and power.
From this moment, one can put forward a hypothesis that is related to a strange ancient rating of
money interests. Strangely enough, two different rates of interest were put into practise in the
mesopotamian temples. For barley and silver, rates were 20 and 33,3 %. At the same time, the loans
agreed on by the temples were particular in that they were made in barley for the peasants and silver
for the “citizens”. Polanyi notes that if we acknowledge that, in the African manner, one money
(here barley) is not able to buy the other (here silver)60, it is perhaps not surprising that the rate of
55Polanyi
56Polanyi
57Polanyi
58Polanyi
59Polanyi
60Polanyi
[1977, p. 118].
[1977, lii].
[1977, p. 120].
[1977, p. 117];
[1977, p. 120].
[1977, p. 118].
13
interest of the money of low status is higher than that of the money of high status. This phenomenon
may be explained by the impossibility of converting the interest of the debt expressed in a quantity
of inferior goods into superior goods.
Thus, these customary rates, associated with the differentiation of the money uses, contribute to
the establishment of even greater social stratification. Polanyi does not look at this point more
closely, however interesting it may be, as he is more concerned sometimes with forms of social
integration than forms of oppression. In fact, the crises of Mesopotomian cities from the oldest age,
are due to the impossible reimbursement of debt by the dominated levels of society. Now, one can
think that the higher levels of interest rates participate in the perpetuation of the state of events,
from which come political troubles, moratory institutions etc. In other words, if ancient money
greatly solidifies social bonds, while introducing a rigidity that has no need of “bureaucratic
control” as asserts Polanyi, it would be right to remember the political breakdowns that characterise
such a rigidity. The crises of debt in early antiquity thus allow us to understand more easily
Commons's remarks :
“Historically, it is more accurate to say that the bulk of mankind lived in a state of unreleasable
debts, and that liberty came by gradually substituing releasable debts”61.
With modernity, the institution of credit money, which is nothing other than the effective
consecration of the principle of free circulation of debt, allows us at least a possible contestation62
of age-old hierarchies.
Therefore, according to Polanyi, non-modern money was by its nature linked quite directly to a
political system. Society's submission to a selfadjusting market would not be possible without the
fusion of money uses into one single use, the all purpose money. The modern and contingent idea of
all purpose money is the mental product of the commodity-money ideology, which is magnificently
illustrated by the reign of the gold-standard. This original metamorphosis, is only one part of the
first “transformation” which leads to the selfadjusting market. But the “Big Market” is only an
utopia63 that causes a paradoxical movement of liberation and regulation, that is the “double
movement”.
B/The case of modern money : the paradox of the money of the “Big Market”
It is necessary to rethink this utopia. Far from Marx and Ricardo, on the subject of the 20's, when
nostalgia for the gold-standard governs, Polanyi observes 64 :
“Whether the gold itself has value for the reason that it embodies labor, as the socialists held, or
for the reason that it is useful and scarce, as the orthodox doctrine ran, made for once no
difference. The war between heaven and hell ignored the money issue, leaving capitalists and
61Commons [1992, p. 390].
62This is possible but not necessary.
This will be the object of Commons ulterior reflections on monetary policy.
The absence or incoherence of these will only abolish the emancipatory possibilities of pure credit money. Cf.
Maucourant [1994].
63Cf. L. Dumont, "Introduction" in Polanyi, 1983 and Servet [1993].
64Polanyi [1957, d, p. 25].
14
socialists miraculously united [...] and Das Kapital implied the commodity theory of money, in its
Ricardian form”.
Polanyi, refusing to consider money as a commodity, suggests an analysis which conforms to the
institutionalist conception of institution. The modern money institution, once more, expresses the
impossible “enclosure” of the economy. Despite the role of private institutes in the creation of
modern money, Polanyi observes the importance of its “validation by the state”65:
“Now the institutional separation of the political and the economical sphere has never been
complete, and it was precisely in the matter of currency that it was necessarily incomplete ; the
state, whose Mint seemed merely to certify the weight of the coins, was in fact the guarantee of the
value of the token money, which it accept ed for the paiement for taxes and otherwise. This money
was not (underlined by Polanyi) a means of payment, it was a means of exchange”.
According to Polanyi, even all purpose money cannot do without the institutional forms which
are the conditions of social integration. The proof of this paradox is that the monetary policy of
central banks, render the so-called automatism of the gold-standard meaningless.
The market economy is not possible with a currency that is purely a commodity. The untimely
scarcity of this money would be so catastrophic that a token money becomes absolutely
necessary 66. Therefore, Polanyi adopts a non-essentialist view of money. The fact that money
practices can be practised simply with symbols does not mean anything in distortion of the “true”
monetary system which results from pure commodity 67. The monetary system of the “One Big
Market” therefore functions on two levels :
a) An international level, where money is a full commodity.
b) A national level, where a mediation functions between the space of commodity-money and the
space of token or fiat money that is connected to the domestic markets. The central bank is this
mediation which makes possible the coexistence of the international gold-standard and of a national
credit money.
Thus, the Central Bank is at the exact point of the joining together of two logics : one is purely
economic as it rests on the means of exchange, and the other is political, because it embodies the
collective identity on which the means of payment is based. The birth of the Federal Reserve
System, could be interpreted as the expression of a counter-movement protecting society and
participating in the construction of a national identity. Paradoxically, during the era of the goldstandard which lasted the period of 1879 to 1929 68,
"the monetary system was the strongest among the economic forces integrating the nation”.
In centralising the supply of credit69, the institution of market by money is made possible by the
Central Bank. Thus, the Bank can partly protect the national economy against deflationary forces
which are created by the functionning of the gold standard70. Open market policy organises a fall in
65Polanyi [1957, d, p. 196]. Guttmann [1994], when analysing the Great Transforaltion, emphasises
66Polanyi [1957, d, pp. 192-193].
67Polanyi [1968, pp. 176-177].
68Polanyi [1957, d, p. 204].
69Polanyi [1957, d, p. 194].
70Thus, according to Polanyi, the creation of money is in part exogene in the gold standard regime.
this fact.
15
price while raising the exportable surplus and liquidating marginal firms. From there, an element of
rationality in the Big Market reduces the
“automatism of gold standard to a mere pretence”71.
Thus, at the very moment when one institutes markets with the aim of establishing a pure
economic regulation of society, society is protecting itself against the devastating effects of
international money-commodity by a monetary interventionnism. This counter-movement of social
“protection” which contributes towards the creation of this “double movement”, that is so
characteristic of liberal societies, shows to what point money is a fictitious commodity, even during
the reign of the gold-standard.
Conclusion
Polanyi believes that the money institution is essential72 to different societies. Whether primitive,
archaic, capitalist or socialist73 they must be thought of as being monetised74. In other words,
Polanyi never ceases to maintain that the money and market institutions hold an important place in
society, even if market, contrary to money, is a young institution of human history. The only danger
lies in the desire to reduce money to a pure commodity and thinking that markets could be selfadjusting.
71Polanyi [1957, d, p. 195].
72This is the central to Servet
[1993]. Actually, it is possible to extend Polanyi's anthropology : man, as a social
being —zoon politicon— necessarily knows money as the institution that solidifies social relationships thanks to
"standardising and standardised" devices. However, it is impossible to confirm, as Hodgson does, that Polanyi could
have maintained that money existed in the periphery of non-modern economies. Too many of Polanyi's citations
regarding money testify the contrary (see again on this subject, Maucourant [1994]).
73This is why socialism which makes an abstraction out of the necessity of monetary order has no viability. It is
worth noting that, in the case of the decentralised socialist society desired by Polanyi, money is a means of embedding
economy into society in a humanist way as a contradictory evaluation of wills are able to express themselves. This
necessary to avoid the dangerous dream of a "natural economy" which is technically impossible when neither custom
nor tradition produce steady lines of action. Weber [1971, pp. 110-111], may be just before Mises, notices this technical
feature of money that Polanyi will never ignores
74If the continuation of Polanyi's thought on this question of money appears to us to be certain, the same
interpretation also appears possible with regards to market. The Great Transformation soundly constitutes the end of
market society. But the new reality does not constitute in any way the "absence of markets", these assuring "freedom of
consumers, to indicate shifting of demand, to influence producers' income, and to serve as an instrument of
accountancy, while ceasing altogether to be an organ of self regulation" [Polanyi, 1957, d, p. 252] and allow
accounting. Polanyi never ends in his confirmation that money institution has an important place in society.
16
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